NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Colorado Springs Utilities, CO (CSU) bonds:
--$125,000,000 utilities system refunding revenue bonds, series 2015A.
The 2015A bond proceeds, along with other available revenues, will be used to refund all or a portion of the series 2007C bonds, series 2008B bonds, series 2008C bonds and 2009A bonds, fund the reserve fund and pay issuance costs.
In addition, Fitch affirms the 'AA' rating on $2.38 billion of outstanding utilities system revenue bonds.
The Rating Outlook on all bonds is Stable.
SECURITY
The bonds are payable from net pledged revenues of CSU's combined utility system (electric, water, wastewater and gas).
KEY RATING DRIVERS
CAPITAL REQUIREMENTS MODERATING: CSU's capital program, while still sizeable, has begun to moderate, reflecting the near completion of the Southern Delivery System (SDS), a major regional water project. Capital needs for the period 2015 through 2019 are expected to approximate $1.2 billion, divided among water and wastewater facilities and electric environmental projects. CSU estimates that about 72% will be cash funded.
FINANCIALLY SOUND: The combined utilities system has a record of good financial performance, and the CSU board has established a policy of targeting a rate coverage ratio of at least 2.0x (which includes development fees and is after surplus payments to the city). While total variable rate debt is high, 83% of exposure is currently hedged.
MODERATE RATE INCREASES PLANNED: CSU expects future rate adjustments to be more moderate following a period of rapid rate increases to support the construction of major projects. City council has been supportive of rate adjustments, demonstrated by approving an approximate 5% electric base rate increase in January 2015 and planned small net rate increases for both the electric and water systems in 2016. Utility rates are generally competitive with surrounding utilities.
RESPONSE TO HEAVY PRECIPITATION: Heavy rainfall in recent years, counter to other western states, has resulted in reduced water sales and below budgeted water system revenues. CSU is examining various strategic options to mitigate this concern.
ECONOMIC GROWTH: Residential construction has improved from the recessionary lows, but new development is likely to remain below the level previously experienced.
RATING SENSITIVITIES
RESTRICTIVE RATE POLICY: The failure to approve and implement planned and necessary rate increases among the Colorado Springs Utilities systems could put negative rating pressure of the 'AA' rating.
DISLOCATION IN SHORT-TERM MARKETS: The utility could be exposed to swings in interest rates (particularly on unhedged bonds), and renewal/replacement risk on expiring liquidity facilities and collateral posting requirements due to its heavy reliance on variable rate debt.
CREDIT PROFILE
The combined utilities system is owned by the city of Colorado Springs and operates as an enterprise fund of the city. Rates are approved by the city council.
The city of Colorado Springs, located in the south central Front Range, has a population of about 438,000. The El Paso county unemployment rate exceeds that of the state, but is generally in line with the nation. CSU serves customers in the city of Colorado Springs and surrounding suburban communities. Percentage operating revenues for calendar year 2014 were: electric (49.1%), gas (24.1%), water (18.7%), wastewater (7.6%) and other (0.5%). Electric and water systems provide the largest share of operating income.
FUEL SUPPLY MORE DIVERSIFIED; ENVIRONMENTALLY IMPACTED
CSU's electric system provided service to about 220,000 active meters in 2014, a 1.5% increase over the prior year. Electric revenues are diversified among customer class.
CSU's generating resources available for summer 2015 included: coal-fired generation (40%), natural gas and oil (49%), hydro generation (10%) and other renewable resources (1%). With the acquisition of the gas-fired Front Range power plant in December 2010, CSU's owned generating capacity has become better balanced between natural gas and coal. However, coal will remain the dominant fuel, based on energy, for years to come. No major new electric generation is likely to be needed for approximately 10 years, assuming continued operation of existing facilities.
CSU's electric operations are subject to various environmental requirements, many of which are related to allowed emissions of plant pollutants. Compliance with such regulations impact operations and capital costs for the electric system. CSU's fossil fueled plants have sufficient emission allowances to satisfy sulfur dioxide emission reductions into 2018. CSU is installing necessary emission controls (scrubbers) to remain in compliance with sulfur dioxide requirements thereafter. The CSU Board has directed management to evaluate possible options for its coal-fired units. This review is currently underway.
WATER SYSTEM EXPANSION NEARING COMPLETION
CSU's water supply is heavily reliant on the Colorado River Basin and the Arkansas and South Platte River systems. Even with drought conditions in the western United States, CSU believes it will have sufficient water supply to meet the growing needs of the area until approximately the 2040 decade.
Colorado Springs has been planning the construction of the SDS raw water delivery system from the Pueblo Reservoir (federally owned facility) since 1996 to supplement and back up the city's current water resources. The project was initially scheduled to be completed in 2012. However due to delays, Phase 1 will now be completed in 2016. A new treatment plant, which is part of SDS, is scheduled to be on line in early 2016, adding significantly to treatment capability. Rate increases implemented to date should recover project-related costs, which have been well below original estimates. No future rate increases to fund SDS are currently anticipated.
Above average precipitation in recent periods has resulted in reduced water sales and below budgeted water system revenues. CSU is looking at a number of strategic options to mitigate this risk, including an adjustment to water rates, a further reduction in system costs, budgeting higher debt service coverage (DSC) and the possible creation of a specified liquidity fund.
FINANCIAL PERFORMANCE STEADY
CSU maintains solid financial metrics on both a combined basis and individual system basis. Fitch-calculated DSC approximated 1.87x in 2014 and coverage of full obligations equaled 1.67x. This gives no credit for connection fees, which adds about 20 basis points to DSC. CSU's board maintains a goal of achieving an adjusted rate coverage ratio around 2.0x, which is after any surplus payments to the city.
While internal liquidity is generally below the rating category median for 'AA' rated retail systems, available bank lines further help to bolster CSU's overall liquidity position to 174 days on hand at year end 2014. Cash on hand totaled 125 days.
At Dec. 31, 2014, CSU had $816.9 million of variable rate parity bonds outstanding, which were supported by liquidity facilities. This equates to about 35% of its total outstanding bonds. However, only around 6% of total debt is not hedged. Total transfer payments to the city average a reasonable 3.8% of total operating revenues.
The utility is in the process of putting in place, by late 2015, a commercial paper program in the maximum principal amount of $150 million. The commercial paper will be backed by designated credit support facilities, which will be subordinate to the lien securing parity bonds. Initial usage is estimated to approximate $33 million, with a peak draw planned at around $80 million. Long-term debt will be used periodically to fund out commercial paper.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990105
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990105
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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